OCC’s Hood Sees Value in Using Alternative Data to Expand Credit Access

On Monday (March 31), PYMNTS Intelligence reported that for impulse and emergency purchases alike, a sizable segment of consumers are slightly more likely to pay with credit than cash. Roughly a third opt to use credit cards. More than a third of impulse and unplanned expenses are loaded onto those cards.

But separate PYMNTS data shows that a significant slice of the population — at roughly a quarter of individuals — are credit marginalized, having been rejected for at least one credit product or service. The lower the FICO scores, say, below 650, the more likely consumers are to be marginalized. Data published this year indicates that 29% of subprime borrowers had seen their applications for credit cards denied.

Need Credit to Get Credit

In part that’s due to the metrics of traditional credit scoring, where limited histories tend to beget … limited histories, because consumers have not been allowed to access credit, pay it down, and offer up a snapshot of their attractiveness as would-be borrowers. In other words, you can’t build a creditworthy profile without being granted credit in the first place. 

Last year, the Federal Reserve Bank of Kansas City noted that younger people making less than $75,000, and particularly minorities, were more likely than other people to be denied credit. Traditional scoring may not reflect an individuals’ ability to repay accurately. 

In recent years we’ve seen the rise of alternative metrics, such as bank account data and cash flow underwriting, or even public records and other data sources, to bolster underwriting. Buy now, pay later (BNPL) offerings are on the radar to be included in credit reporting. Earlier in March, Affirm said that beginning in April, it will feed information about all of its payment plans to credit reporting company Experian.

The reporting will include its pay-over-time products, in addition to the monthly installments of longer-term loans that it already reports to Experian, including biweekly payment plans, Pay in 30 (single installment), Pay-in-2 and Pay-in-6 options. 

FICO is already planning to add BNPL to its scoring models, though this will take time. Experian said this month that its Cashflow Score gives lenders a clearer view of applicants’ financial behavior, and aims to help people with little to no credit history improve financial access using only consumer-permissioned bank account data.

More recently, and in remarks at a conference held at the end of last week from Rodney Hood, acting head of the Office of the Comptroller of the Currency, said that alternative data has value in credit scoring.

“A bank account is a starting point in financial inclusion, not an end point. This first bank account can lead to longer-term savings, access to credit, 401(k) and other retirement accounts, and wealth-building opportunities,” and added that “Banks can provide this access through small dollar loans that help consumers meet short-term needs and build their credit history.” 

Elsewhere in the remarks he said, “Another approach to increasing financial inclusion is leveraging the potential of financial technology. … FinTech tools can be used to provide banks with analytical tools to explore customer cash flow analysis and spending habits — data that can be used to leverage products that can facilitate bank lending decisions as well as materials to incentivize consumer savings.” 

Several banks, he said, have begun piloting tools that analyze consumers’ habits in making deposits and paying bills as a means of “determining their ability to manage debt for credit underwriting purposes. This creates a range of opportunities for those who lack a FICO score and are ‘credit invisible.’”  Those pilot programs use alternative, non-FICO data to offer credit-impaired consumers lines of credit that, in turn, help bring them more fully into the financial mainstream.

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